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Why Inflation is Harmful

This question may seem to be ridiculous. What does it mean, why inflation is harmful? Are there any other ways it can be? Inflation means the increase in prices – how it can be good or simply neutral? But not everything is that simple. Let us look closer.

Inflation is the increase of prices. But the problem is not in this, but in the fact that they don’t grow stably and that they increase differently in different spheres. Some commodities rise in price faster, some slower. If everything grew in price with one and the same tempo, nothing would have been changing. The cost of any commodity would always be the same when related to any other commodity.

The problem is that the money is a commodity, just like everything else. And it is the only thing the relative cost of which is constantly getting lower. This also explains why there exists such a thing as interest rate. On the one hand, the money that is given to the borrower now will cost less when the time will come to give it back. On the other hand, money not being some kind of abstract substance, but a commodity in its own right, has to return to the loaner in greater amount for the deal to be in any way profitable. That is why the interest rate is always slightly higher than the expected inflation rate.

The understanding of this mechanism can help understand a lot of thing, but mostly one idea – why it is generally better to have money invested in something than to keep them as it is. Money is the only thing that is sure to be getting cheaper.

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